Decision restores the status quo for funding of defence costs by insurers

The New South Wales Court of Appeal has clarified the operation of the statutory charge on insurance proceeds (charge) provided for in NSW by section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).  In a lengthy unanimous judgment in Chubb Insurance Company of Australia Limited v Moore, the Court determined a number of important issues for the insurance industry, but the two key points for insolvency professionals are:

  • The charge does not prevent the insured from having defence costs funded prior to judgment or settlement of a claim, such that the policy limit of liability can be substantially consumed on defence costs (leaving little to pay a judgment or settlement).
  • In a context of multiple, competing claims against an insured, the charge does not prevent an insured (and an insurer) from exhausting the policy limit of liability by paying one claimant, to the exclusion of another, if the first claimant reaches judgment or settlement before the second claimant.

In those respects, the Court's decision accords with the approach taken by the New Zealand Court of Appeal in litigation arising from the Bridgecorp collapse.

While not unexpected, those two developments point to three strategic issues for insolvency practitioners when considering recovery litigation in the course of a formal appointment:

  • The steps and issues in any pre-litigation investigations and subsequent litigation should be limited and narrowed. Both litigation defence and public examinations done in the course of pre-litigation investigations will be funded by the insurer, with every dollar spent reducing the insurance proceeds available to pay a judgment or settlement.
  • To further maximise the insurance proceeds available for actually paying a judgment or settlement, early settlement talks or mediation should be considered.
  • In a complex insolvency, where potential defendants are likely to face claims by both the company and other claimants (e.g. shareholders or debentureholders), consider co-ordination with other claimants, in order to avoid a "race to judgment" and minimise wastage of insurance proceeds on defence costs of multiple proceedings.

Those issues are all intended to ensure that insurance proceeds are available to enlarge the insolvent estate, rather than spent on litigation.

Turning to future developments, the possibility of an application for special leave to appeal to the High Court remains and an appeal to the New Zealand Supreme Court in the Bridgecorp litigation is pending. So, further developments in this area are therefore possible, but in the meantime the Court of Appeal's decision is determinative of the relevant issues in NSW.